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Unum GroupUNM 0.267538644470868%Unum GroupU.S.: NYSEUSD33.73
0.090.267538644470868%
/Date(1427835923051-0500)/
Volume (Delayed 15m)
:
1640681AFTER HOURSUSD33.73
%
Volume (Delayed 15m)
:
10679
P/E Ratio
21.348101265822784Market Cap
8457869706.16272
Dividend Yield
1.956715090423955% Rev. per Employee
1108240More quote details and news »UNMinYour ValueYour ChangeShort position
announced in early February that it would take a pretax charge of nearly $900 million to exit the group long-term-care insurance business, all the old fears that have haunted the stock surfaced, and the shares slumped on three times their normal daily volume.

Those concerns surfaced again last week when Unum's first-quarter results fell three cents short of expectations on poor performance in its U.K. life-insurance unit and in the long-term-care business that's still on its books. Unum executives also said they now expect earnings to rise at the low end of a previously forecast range of 6% to 12% this year.

The worries are understandable, and investors can be forgiven for having a "here-we-go-again" moment. But Unum's decision to leave the tricky long-term-care business actually makes its shares more attractive. Sales were strong in the quarter, especially in the U.K. The life insurer bought back $175 million of its stock in the period and raised its quarterly dividend nearly 24%, to 13 cents a share, signaling "confidence in our future," CEO Thomas Watjen tells Barron's. Calling the subpar U.K. results "an anomaly," Watjen vows to improve them, adding that he expects growth trends to keep improving this year.

For much of the past decade, Unum has been under a cloud because of shoddy and unprofitable policy underwriting that has forced it to boost its claim reserves. Moreover, its former practice of denying coverage to disabled clients resulted in an expensive settlement in 2005 with attorneys general in 49 states. Another settlement in 2006 ended a probe led by then-New York attorney general Eliot Spitzer into "pay-to-play" broker compensation and incentives.

Barron's has long urged caution on Unum shares (ticker: UNM); we last wrote about the company, skeptically, in 2009. Yet Unum seems to have cleaned up its act and forsworn its onetime strategy of building market share by aggressively undercutting rivals' prices. It has focused instead on improving profitability and steadying returns.

Persuaded that Unum is adequately reserved, and impressed by its strong balance sheet, sizable cash flow, and improving fundamentals, some former Wall Street critics now favor the company. "Trust is earned and not assured," says Eric Berg, who is in charge of insurance research at RBC Capital Markets, "and for many quarters and years Unum has been blemish-free. They have done a good job of re-earning investor respect and confidence." In early March, Berg upgraded his opinion to Outperform, comfortable that Unum wouldn't be adding to reserves again in the foreseeable future and optimistic that it could deliver better-than-expected results from stronger premium growth in its core business—group disability insurance—as general employment trends improve.

In late February, JPMorgan analyst Jimmy Bhullar also raised his rating to Outperform, after carrying a "negative legacy bias" toward Unum for years. "It took a long time to go Neutral," he says, which he did in 2008, "but it's a different company than it used to be."

Unum's business is changing, too. Bhullar points to firming prices in disability premiums here and in the U.K. for the first time in years, a development expected to raise margins and earnings. A strengthening job market should boost premium growth and reduce claims, which also would lift margins. And Unum plans to buy back $500 million worth of its shares this year, which would aid earnings; Bhullar thinks the total could be higher.

THERE'S NO QUESTION that the Chattanooga, Tenn.-based company's valuation is attractive. At a recent $22.47, the stock was changing hands at under 80% of its estimated book value of roughly $30 a share. With a market value that is 65% of its $10 billion in annual revenue, Unum represents a very inexpensive bet on a well-capitalized and dominant provider in the group disability and life-insurance markets.

It now fetches less than 7.2 times this year's expected earnings of $3.11 a share and about 6.6 times 2013's projected $3.41. That represents a 10% discount to the life-insurance sector, on both earnings and book value—despite a return on equity of 11.4% expected for 2012, a full percentage point higher than the group's 10.4%; steady earnings growth and a strong balance sheet.

The Bottom Line

Unum shares, now in the low $20s, trade well below their book value of around $30. Bulls think they could rise 20% over the next 12 months.

Bhullar thinks the stock deserves to trade at a premium to its peers and sees it reaching $27 by year end on a modest expansion of its book and earnings multiples.

The group disability policies that Unum specializes in are typically short-term contracts—with durations of less than two years—that pay set benefits for a specific period and so tend to be more predictable. Their short-term nature allows them to be repriced relatively quickly in response to market changes.